Pret and Leon's cost reduction plans

Nicola Knight
Senior Analyst - Food-To -Go
@IGDShopperNews

Date : 02 June 2020

Two of the UK’s leading food-to-go operators, Pret and Leon, are in discussions with landlords over new rent agreements as part of a focus on reducing their cost bases.  Like many hospitality businesses, the companies are under substantial financial pressure resulting from a sharp decline in footfall since the start of the UK’s coronavirus (COVID-19) lockdown. 

Pret’s ‘comprehensive transformation plan’ 

Pret, who has c430 UK sites, has appointed professional services firm Alvarez & Marsal and property agent CWM to undertake a “comprehensive transformation plan”.  Focussed on managing costs, the plan could see it press landlords to move to a turnover-based rent model as well as a limited number of permanent stores closures as the company aims to “adjust its business model in a new retail environment”.

Pret CEO Pano Christou said: “Like the rest of the industry, we have been radically adapting our business model to succeed in the face of the changing market conditions. Reduced footfall, combined with high rental costs, have placed substantial pressure on our business. We are putting together a clear plan to address these issues and are already making good progress, with more than 300 shops up and running again as of next week".

Last month, Pret began talks on securing a €100m loan from its banking syndicate to help it fund a “test and learn stage” to develop the operation once restrictions have been lifted.  As well as investing in new safety procedures and equipment for its store, Pret has  also accelerated sales through new channels, including the launch of its first retail coffee offering with Amazon, extending its partnerships with delivery service providers Deliveroo, Just Eat and UberEats, and offering Pret ready meals to heat at home alongside essential groceries.

Over 300 of Pret’s sites have now reopened. To tempt customers back, yesterday the company launched its biggest ever coffee promotion, offering customers 20 organic coffees for just £20. By purchasing a card through Pret shops, customers can get their daily coffee for just £1. Clare Clough, Pret UK managing director, said: “We’ve heard from many customers on social media about how much they’ve missed their regular Pret caffeine fix over the last few months. Launching our biggest and most generous coffee promotion felt like right way to welcome customers back to Pret, now that we’re reopened more shops across the UK for both takeaway and delivery.” 

Leon working with advisors and landlords to find ‘right solution’

Following a similar path is healthy fast food brand Leon who has also announced it is working with advisors and landlords to review current rental agreements.  The chain, which has over 60 UK stores, has reinvented its sites since the beginning of lockdown, transforming them into mini supermarkets selling its own range of retail products and other groceries for delivery and collection alongside its range of food-to-go.  It has also launched a nationwide ready meal delivery service to target meal missions that have moved from out-of-home to in-home.

How lockdown could change operator and landlord relationships long-term

Currently most hospitality lease agreements aren’t based on turnover, however, the coronavirus crisis has shown that for operators to weather economic ups and downs agreements based on a partnership approach between landlords and tenants may need to become more common. 

Turnover-based rental agreements essentially balance risk and reward, encouraging landlords and tenants to operate under a shared objective of maximising sales. They can be structured in several ways, as a percentage of gross receipts/sales/turnover with or without a base rental level depending on the level of risk accepted by the landlord.

If coronavirus restrictions lead to multiple business failures in high street, shopping centre and retail park locations, demand for space will decline leading landlords to consider turnover rents to attract tenants.  This model could incentive landlords to take more proactive action to increase footfall to an area (for example a shopping centre) in order to boost tenant revenue, and therefore rent payments.  However, it could also lead to landlords reacting more quickly if sites aren’t meeting expected levels of trade, ending leases and freeing up the unit for a more profitable tenant.

Rents were already an issue for hospitality businesses before the impact of coronavirus and the lockdown will accelerate calls for the traditional landlord/tenant relationship to change to a more flexible model, particularly now high profile operators such as Pret and Leon are pushing for change.

For more on Coronavirus (COVID-19)

  • Find out what food-to-go operators and suppliers can learn from China - read our report here
  • Latest news and reports click here
  • How IGD is working with the food and consumer goods industry during coronavirus - visit our dedicated webpage